Suburban hotels feel the pinch

Several factors lead to problems, even shutdowns

The pile-up of bad news shaking the travel industry is sending reverberations far beyond such obvious icons as major airlines and big-city hotels and convention centers.

On the Chicago hospitality scene, the pain appears to be deeper and more distressing for some suburban hotels than it is for their downtown counterparts. Several properties are in Chapter 11 bankruptcy reorganization, or teetering close to it, industry observers say. And this spring could bring an increasing number of property sales at slashed prices.

"The more vulnerable are the smaller independents, and they tend to be in the suburbs," said Ted Mandigo, owner of T.R. Mandigo, a hotel consulting firm in Elmhurst.

In particular, properties that were acquired within the past three to five years, using significant debt, are struggling to operate, he said.

While the whole travel industry is reeling from the effects of a flaccid economy, the terrorist attacks of 2001, the war in Iraq and a deadly virus in the Far East, several additional factors have combined to further cramp some suburban properties in the Chicago area.

With convention attendance in the doldrums and corporate travel budgets pared back, downtown hotels no longer have overflow business to direct to the suburbs--a big hit for some outlying properties.

And with downtown room rates dramatically reduced, big-city properties have been snaring some cost-conscious business that traditionally opted for the less-expensive suburbs.

"Some of our clients who typically meet in the suburbs are saying, `Hey, let's see what we can get downtown,' when they've not considered it before because they thought it was outside of their budgets," said Mary Jo Blythe, president of Masterplan, a meeting planning company in Clarendon Hills.

This scenario "certainly is not unique to Chicago," said Ty Helms, vice president of sales for Chicago-based Hyatt Hotels Corp. "As a result of current economic conditions, it is occurring throughout the country wherever there is a city with a vibrant and desirable downtown that is experiencing a decline in its business."

Layered atop all of this has been a drop-off in air travel, which has wounded some O'Hare-area properties.

"The whole airport corridor is really struggling," said Robert Habeeb, president of First Hospitality Group, a Des Plaines-based company that owns or operates 25 hotels in five states, including two near O'Hare. "When O'Hare was bursting at the seams, it was good for hotels. But the system is not bursting anymore."

Both downtown and suburban hotels, as groups, have experienced significant declines in average occupancy rates, room rates and revenue per available room, a key measure of profitability, since the banner year of 2000, according to data from Smith Travel Research. But the suburban convention hotel group has dropped to levels that are decidedly more uncomfortable.

Downtown convention and conference hotels had an average occupancy rate of 69 percent at year-end, for instance, while the suburban group was at 54.7 percent, according to Smith Travel Research.

"The gap definitely has widened over the last couple of years between downtown and the suburbs in terms of convention hotels," said Steve Marx, president of Hotel Source Inc., a hotel brokerage in Chicago. "There are a lot of delinquent loans out there."

Quantifying the delinquency picture is difficult.

Nationwide, hotel delinquency rates have been rising steadily since 2000, with 5.7 percent of loans delinquent by at least 60 days at this point, according to New York-based Trepp LLC.

Trepp found no such delinquencies in the Chicago region at the moment. But local observers say there are delinquencies that are flying under this radar screen.

Mandigo estimates five or six individual properties have filed for Chapter 11 protection, with others on the verge. As well, "a lot are in forbearance with lenders," he said.

"And some have changed hands as a consequence of their financial performance," he said, with the owner selling at a significant discount because of financial problems. And more of these scenarios should crop up this spring, he added. (He and others declined to identify specific delinquent properties.)

While there is distress out there, the picture is not exclusively gloomy.

Many hotels have been able to slash fixed costs sufficiently to keep going at occupancy rates below the 70 percent benchmark, which is often considered the necessary level to break even.

And the suburban scene is far from monolithic--with some areas doing better than others, depending on the economic base in the immediate vicinity, according to chains such as Wyndham and companies such as First Hospitality.

"Suburban is a mixed bag--it's very local," said Habeeb, of First Hospitality.

Citing properties in his own company's portfolio, he noted that the Hampton Inn & Suites Lincolnshire has held up well because the local corporate base includes pharmaceutical companies, which have fared decently even in the economic downturn.

Meanwhile, AmeriSuites Warrenville and Fairfield Inn Naperville have been hurt by their location in the region's high-tech corridor.

Wyndham, Marriott International Inc. and First Hospitality are among the companies reporting signs of a pickup in business.

The Wyndham Northwest Chicago in Itasca, for instance, has had a great start to the year, said Jamie Walters, senior vice president of sales at Wyndham International, based in Dallas.

"A lot of companies had postponed or scaled back training or development activity, but we're seeing a lot of it come back this year," he said.

Marriott reports it is achieving modest growth this year over 2002 in the Lincolnshire, Schaumburg and Oak Brook areas. And Habeeb reports a small but encouraging increase in meeting business at Indian Lakes Resort in Bloomingdale.

"People are finally pulling the trigger," Habeeb said, attributing the willingness to sign contracts, at least in part, to increasing confidence that the war in Iraq will be over soon.